Australia's fake 'crisis' of high wages

Australia's fake 'crisis' of high wages

High wages drive productivity growth. They create domestic demand for the things that shop assistants sell and waiters serve, and, unsurprisingly, high wages increase workers' material standard of living. Put simply, rising real wages are a sign that an economy, and more importantly the people in it, are doing well.

But back in January 2014, soon after the "grown-ups" in the Coalition were returned to government, the then employment minister, Eric Abetz, warned of a wage "explosion". The dire warning, straight out of the modern Coalition playbook, was designed to whip up unfounded fears and create a "crisis" that needed "decisive intervention".

Not even the employers believed him. The Australian Industry Group's head, Innes Willox, declared at the time that not only was Abetz wrong but that "the days of significant wage increases are pretty much over". Less than a month after Abetz warned of his explosion, the Bureau of Statistics released data showing that 2013 had delivered the slowest year of wages growth in the 16-year history of the wage-growth index. Whoops.

Like Joe Hockey's "budget emergency", Abetz's scare campaign about rising wages did more to scare his own backbench than it did to scare the voters. Like the attack on health and education spending in the 2014 budget, the attack on "exploding" wages floundered on both policy and political grounds. At the time, the employment minister was playing Chicken Little; voters who were watching their incomes flatline didn't like hearing that it was their greed that was holding the economy back.

High wages, or high fuel prices, simply help to ration something scarce (labour or petrol).

High wages, or high fuel prices, simply help to ration something scarce (labour or petrol).Credit:Wade Laube

Between 1997 and 2012, wages growth averaged 3.6 per cent a year but, since then, wages growth has slowed right down to average just 1.9 per cent a year. This is the lowest since wage price index data have been collected and has only just kept ahead of inflation, running at 1.5 per cent.

Low wage growth is not an accident; it is a policy goal. Changes to Australian industrial relations laws have systematically reduced the rights of workers and unions to organise, protest and strike. Indeed, Australian laws that criminalise something as fundamental as the right to strike are so onerous that we are in breach of International Labor Organisation laws. Weakening the bargaining position of workers is specifically designed to weaken wage growth.

Similarly, the purpose of 457 visas is to suppress wage growth by allowing employers to recruit from a global pool of labour to compete with Australian workers. When demand for workers rises, employers need to bid against each other for the available scarce talent. It is only in recent years that the wage rises that accompany the normal functioning of the labour market have been rebranded as a "skills shortage".

When demand for petrol rises on the Thursday before a long weekend, it would be rare to hear it called a "petrol shortage". The petrol stations receive a windfall profit, the customers get grumpy, and that is pretty much how capitalism works.

The increase in price that accompanies an increase in demand is inevitably good for sellers (like workers with rare skills and petrol stations) and bad for buyers (like employers and holiday makers). But the existence of higher prices is not, in itself, evidence of a problem. Indeed, economists would usually argue that such price rises often increase economic efficiency.

The first efficient function of high wages, or high petrol prices, is that it helps to ration something scare. Those employers who value the skills the most, and those drivers with the least petrol in their tank, will pay the higher prices while others will choose to wait or find an alternative. This takes some heat out of the market.

The second thing economists like about high prices – for wages or petrol – is that, if they are expected to stay high, people will find, or invest in, ways to use less of the scarce resource. That is why high wages boost productivity growth; they give employers an incentive to invest in better processes, machinery and training.

It's not an accident that more machinery and fewer shovels are used to build roads in Australia than in developing countries. Because we have higher wages, rational road-building companies invest in bulldozers and graders rather than recruit huge teams of labourers. If Australia wanted to "create jobs", we could ban bulldozers. But while lowering the productivity of construction workers would boost employment in the short term, it would do nothing to boost living standards in the long term.

Voters who were watching their incomes flatline didn't like hearing that it was their greed that was holding the economy back.

The third, and possibly most important, benefit of high wages and high petrol prices is that they have the potential to encourage new workers, and new petrol stations, to enter the market. If a "skills shortage" leads to a boost in wages for plumbers or aged-care nurses, the most likely response is for the higher wages to attract more people into the industry. Similarly, firms that want to avoid "skills shortages" could do something old-fashioned like train up their workforce of tomorrow.

But in Australia, just as we ruined the efficiency of the petrol market by letting the big petrol station chains buy each other up, we have ruined the labour market by abolishing and undermining our key training institutions while at the same time destroying the incentives for workers to invest in their own skills.

Once upon a time, the state government-owned electricity, water and rail utilities trained tens of thousands of apprentices, many of whom, on completing their training, went off to work in the private sector. The privatisation of those services had a catastrophic, and entirely predictable, effect on Australia's labour market.

Over the same period, the move away from full-time secure work to casual, contract work has fundamentally eroded the incentives for either employers or employees to invest in acquiring skills that are specific to a particular enterprise. When there is no guarantee that either party will reap the rewards of any investment in training, it should be of no surprise that no one makes such an investment.

So here we are in 2017, one of the richest countries in the world scouring the developed world for people with the skills that our employers (unlike employers in India, the Philippines or Bangladesh) "can't afford" to provide. We have not only destroyed the capacity of our utilities to train workers but, by allowing dodgy training academies to compete with our TAFE system, we have undermined the formal vocational training system as well.

And this week, after years of telling the public that 457 visas were not being rorted by employers simply looking for a short cut to cheap and vulnerable labour, we are told there are massive problems with the system and that employers will need to pass much tougher tests before they can recruit from abroad.

To be clear, there were problems with the use of 457 visas and plans to tighten up their use are welcome. But most of what was announced this week had more to do with solving the Coalition's loss of votes to One Nation than solving the harm done to the Australian labour market by decades of poorly conceived deregulation.

Indeed, the most pernicious element of Malcolm Turnbull's announcement this week is the idea that 457 visa holders face tougher conditions for permanent residency. Making it harder for skilled workers to stay in the country for more than four years will do nothing to increase job opportunities for Australian workers. But by creating a class of "guest workers" with reduced access to services and support, and who have no chance to put down roots here, we will create a caste system within the Australian labour market. Talk about "unAustralian" values.

Richard Denniss is The Australia Institute's chief economist. Twitter: @RDNS_TAI

Dr Richard Denniss is chief economist at The Australia Institute, a Canberra think tank,

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